The correct answer to this question is C: the difference between these two falls as output rises. To see why this is so, let us start by looking at the definitions of ATC and AVC.

A business can be said to incur three kinds of costs. These are fixed costs, variable costs, and total costs. The total costs are made up of the fixed and the variable costs. Fixed costs are costs that are constant regardless of how much output is produced. These are things like the mortgage payments on a hotel, which does not change regardless of how many rooms are rented out. Variable costs change with the level of output. In the hotel example, costs for water usage and maid service, for example, vary depending on how many rooms are rented.

This helps us understand why average total costs (ATC) and average variable costs (AVC) will converge. As output rises, variable costs rise but fixed costs stay the same. This means that variable costs are getting to be more and more of the total costs. Therefore, the average variable cost curve will move closer and closer the to the ATC curve.